Fitch Ratings has affirmed Lesotho's Long-term foreign currency Issuer Default Rating (IDR) at 'BB-' and Long-term local currency IDR at 'BB'. The Outlooks are Negative. Fitch has simultaneously affirmed Lesotho's Country Ceiling at 'A' and Short-term foreign currency rating at 'B'. mLesotho's 'BB-' rating is supported by its CMA membership, which effectively imports the credibility of South Africa's monetary policy via a long-standing peg to the South African rand.
The track record of good governance has also favoured political and macroeconomic stability. General government debt (37% of GDP) is in line with 'BB' peers' median (40%) and debt service is low, reflecting the highly concessional nature of public external debt.
The rating is constrained by weak structural factors including a low per capita GDP (USD1,100) and a poor business environment, which have prevented the private sector developing. The unemployment rate is high, at 23%. The Negative Outlook primarily reflects risks to Lesotho's economic outlook stemming from overseas markets, government revenue volatility, and longer-term developmental challenges.
The marked rebound in Southern African Customs Union (SACU) receipts will bring the budget deficit close to balance this fiscal year after a large deficit in the previous year. However, high SACU revenue volatility will still pose a risk to budget balance from next year. In addition, Lesotho's open economy (exports account for 45% of GDP) faces a challenging environment given global uncertainties and the likely end this year of the African Growth Opportunity Act (AGOA) third country provision, which could erode the competitiveness of the textile sector and further affect exports to the US.
In fiscal year 2012/13 (FY2012/13), Fitch expects the budget deficit to improve to 0.9% of GDP from 12.3% in FY2011/12, thanks to a doubling of SACU revenue (to 29% of GDP from 15%) following adjustments for previous fiscal years. The agency forecasts the budget will remain close to balance in the medium term as the government cuts investment, contains current spending growth and SACU receipts average 25% of GDP.
Under Fitch's scenario, public debt will peak at 42% of GDP by 2014 (37% in FY2011/12) and debt service will remain moderate. Potential SACU volatility that would negatively affect the budget deficit is the main risk to the forecast.
The Central Bank estimates GDP growth reached 4.3% in 2011, supported by public investment and the mining sector. Fitch expects GDP to grow by 5% in 2012 but to slow down to 2.5% in 2013 as major public capital projects will come to completion. The manufacturing sector (12% of GDP), already suffering from stiff competition and low demand in the USA, will be further affected by the expected end of the AGOA third country provision, which has allowed local producers to source cheap raw materials in Asia to contain costs.
Fitch expects net international reserves (NIR) to gradually increase, supported by fiscal tightening, to 3.4 months of current account payments by FY2013/14 from 3.1 months in 2011. NIR have decreased in recent years reflecting the deterioration in the current account balance (a deficit of 16% of GDP in FY2011/12) and the use of government deposits to finance the budget. The current account deficit is expected to remain high (14% of GDP in FY2013/14) due to large investment projects, although this deficit will be largely covered by FDI inflows.
Fitch expects political stability to prevail following the general elections to be held on 26 May. The recent resignation of the Prime Minister from the head of the Lesotho Congress for Democracy to form a new competing party was the result of internal personal disputes rather than a reflection of political discontent or policy differences. In addition, Lesotho has a track record of holding transparent and fair elections. The election could result in a coalition government with more checks and balances than when only one party dominated the political scene.
Deterioration in the global economy, with an impact on global demand for diamonds and US demand for textiles, would directly hit Lesotho's economy and be negative for the rating. It would also indirectly affect Lesotho through its impact on South Africa. The decline of the textile sector, a key employer in Lesotho, threatens medium-term economic prospects and could also have negative rating implications.
SACU revenue has been highly volatile in the past. An unexpected drop in SACU revenue, linked to lower than expected economic performance or revision to the revenue-sharing formula and leading to a divergence from the fiscal tightening path envisaged in the 2012/13 budget would be negative for the rating. In the medium term, the government's ability to lower dependence on SACU revenue through increasing other sources of revenue (e.g. tax, water royalties and exports) and controlling current expenditures would be rating positive.
- The above statement was released by Fitch and carried in full on Reuters, 22 May 2012.